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Friday, February 12, 2016

Broker Report: INARI AMERTRON - Buy on Weakness

AFFIN HWANG: Buy on weakness; INARI - country's top pick for 2016Inari’s share-price correction fully reflects a weak 3QFY16E, in our view. However, earnings should recover in 4QFY16E in tandem with a new product launch and, as such, we leave our EPS forecasts intact. Meanwhile, 2QFY16 earnings, due on 23 February, are likely to come within our expectations. Reaffirm BUY. A country top pick for 2016. 2QFY16 results scheduled for 23 February; we expect no surprises Inari is scheduled to release its 2QFY16 results on the evening of 23 February. Negative surprises are unlikely despite the seasonally weakerquarter and also the slowdown in demand by a major smartphone manufacturer from December 2015. We anticipate a flattish set of earnings in 2QFY16E (1QFY16 core profit of RM42m). Meanwhile, any positive surprises will likely arise from the favourable strengthening of the US$ vis-à-vis the RM. We note that during the final quarter of 2015, the RM had depreciated some 5% against the US$. On the whole, we believe the 1HFY16 results will still fall within our expectations, accounting for some 40% of our full-year forecast. Note that Inari has historically posted a stronger 2H and, in particular, a robust 4Q coinciding with the previous launches of a major phone manufacturer. We expect the same in 4QFY16. 3QFY16E results may be weak, before picking up again in 4QFY16E Coinciding with the weakness across the global smartphone supply chain, we do not believe that Inari will be spared from a production slowdown in 3QFY16. Our checks indicate that inventory levels at Inari are being wounddown, which will likely lead to weaker RF revenue (c. 51% of group revenue). The seasonally weak Lunar New Year holiday period has also not helped. Nevertheless, moving into 4QFY16, we believe that orders will resume for a new major smartphone launch and thus, we leave our FY16-18E EPS intact. Reaffirm BUY and TP of RM4.12; a country top pick for 2016Inari’s share price has corrected some 19% from its peak in the final quarter of 2015, coinciding with the guidance of a slowdown by a major smartphone manufacturer. The price pullback, in our view, fully reflects aweak 3QFY16E and is also consistent with the price correction (stock prices down an average 20-30%) across the key vendors and suppliers to this major smartphone manufacturer. We reaffirm our BUY rating and 12-month target price of RM4.12 (RM5.15 prior to the 1:4 Bonus issue adjustment) based on an unchanged 18x our fully-diluted CY16E EPS.Risks
Key downside risks include a slowdown in global demand for smart
devices, rapid ASP erosion, loss of customer base and introduction of new
technologies that would render Inari’s products obsolete.